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Answer: b) The pension fund may be able to shift its asset allocation to include a lower percentage of equities
An increase in the discount rate reduces the present value of future pension liabilities, including the projected benefit obligation (PBO). Because the plan began fully funded, a lower PBO means the plan is likely to move into a surplus position, all else equal. A better-funded plan generally does **not** need to take as much investment risk to meet its obligations, so it may be able to shift its asset allocation toward a **lower percentage of equities** and more fixed-income assets. - **A** is the opposite of what would usually happen. - **C** is unrelated to the effect of the discount rate on PBO. - **D** is unlikely because a higher discount rate improves the funded status rather than worsening it. Therefore, the correct answer is **B**.
Author: Manit Arora
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Question 21.4.2
Acme pension started the quarter with a pension plan that was fully funded with neither a surplus nor a shortfall. During the quarter, the discount rate used to estimate the projected benefit obligation (PBO) was increased by a rather dramatic 1.5%. If we (unrealistically) assume no other assumptions changed (aka, ceteris paribus), which of the following is most likely to be TRUE?
A
a) The pension fund will need to shift its asset allocation to include a higher percentage of equities
B
b) The pension fund may be able to shift its asset allocation to include a lower percentage of equities
C
c) The plan's sponsor should be able to reduce earned benefits but will not be able to alter future benefit accruals
D
d) The plan's sponsor probably will be required to increase its contribution to the fund above the previously expected level
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